June 8, 2009

Economist's View - 4 new articles

The graph is from "Are there green shoots in the labor market?" by Melinda Pitts and Menbere Shiferaw of the Atlanta Fed. They say "it is promising that the labor market is at least producing some variation from the negative trends." However, see also Jobless Recovery Redux? from Mary Daly, Bart Hobijn, and Joyce Kwok of the SF Fed. They say "Our analysis generally supports projections that labor market weakness will persist, but our findings offer a basis for even greater pessimism about the outlook for the labor market."

Update: Jeff Frankel, a member of the NBER Business Cycle Dating Committee, says we haven't hit bottom yet:

First, the cynics. They tend to wax sarcastic at the idea of "things are not getting worse quite as fast as they were" as a good-news proposition. But a wide variety of recent data indicate that the economy is no longer in the state of free-fall that it entered last September, and this is indeed good news. ...

Second, the academics note (correctly) that there is little information in each individual monthly statistical fluctuation that is measured, because the data are inevitably noisy. Still, the public wants to know, in real time, what is the best we can glean from the information we have.

The members of the NBER Business Cycle Dating Committee (of which I am one) will be responsible for calling the trough when the time is right. We have a range of views... But all of us agree, on the one hand, that a decline in economic activity is a decline in economic activity, and therefore still a state of recession, even if the rate of decline has moderated a lot. But I believe that we also agree, on the other hand, that employment is usually a lagging indicator of economic activity. (For example, the economy continued to lose jobs long after the ends of the 1991 and 2001 recessions. Hence the "jobless recoveries.")

Speaking entirely for myself, I like to look at the rate of change of total hours worked in the economy. Total hours worked is equal to the total number of workers employed multiplied by the average length of the workweek for the average worker. The length of the workweek tends to respond at turning points faster than does the number of jobs. When demand is slowing, firms tend to cut back on overtime, and then switch to part-time workers or in some cases cut workers back to partial workweeks, before they lay them off. Conversely, when demand is rising, firms tend to end furloughs, and if necessary ask workers to work overtime, before they hire new workers. (The hours worked measure improved in April 1991 and November 2001 which on other grounds were eventually declared to mark the ends of their respective recessions.) The phenomenon is called "labor hoarding" and it is attributable to the costs of finding, hiring and training new workers and the costs in terms of severance pay and morale when firing workers.

Unfortunately, as reported by Forbes, pursuing this logic leads to second thoughts about whether the most recent BLS announcement was really good news after all. The length of the average work week fell to its lowest since 1964 ! The ... rate of decline (0.7%) was very much in line with the rate of contraction that workers have experienced since September. Hours worked suggests that the hope-inspiring May moderation in the job loss series may have been a minor aberration. If firms were really gearing up to start hiring workers once again, why would they now be cutting back as strongly as ever on the hours that they ask their existing employees to work? My bottom line: the labor market does not quite yet suggest that the economy has hit bottom.

There's at least one person who doesn't think economists deserve all the blame for the economic crisis. Harold James says other academic disciplines and "a cultural climate that pushed experimentation and the rejection of traditional values" contributed "at least as much":

Leading bankers were initially the most obvious culprits. ... They appeared arrogant and overpaid, and were easily demonized. But what about the political process? Why were the banks not more closely controlled and better regulated? ... Governments are now vulnerable, and politicians are under attack almost everywhere. ...

Today the attacks are not limited to the political and financial establishment. Critics are trying to identify the ideas as well as the interests that were responsible for financial and economic dysfunction. ...

Since it is an economic crisis, most people seeking its intellectual roots are tempted to begin with economists... The founder of the rational expectations revolution, Robert Lucas, is endlessly quoted as having stated in 2003 ... that the "central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades." ...

Other academic disciplines have looked rather smugly at ... their colleagues in economics. The non-mathematical appear to have their revenge, as the perils of over-reliance on complex symbolic notation and arcane formulae are relentlessly exposed.

In fact, developments or fashions in other academic disciplines and also in the general culture contributed at least as much to a willingness to engage in absurd risks and to provide and accept valuations of complex and inherently unfathomable securities. The general cultural developments are sometimes termed post-modernism, which involves the replacement of reason by intuition, feeling, and allusion.

But post-modernism has itself been generated by technology, with which it has a deeply ambiguous relationship. In contrast to a steam engine or an old-fashioned automobile, whose operations were easily comprehensible, modern automobiles or airplanes are so complicated that their operators have no idea how the technology they are using actually works. ...

Post-modernism moves away from the rational culture of the so-called "modern era." Many people are finding more analogies with medieval life, in which humans were surrounded by processes that they found difficult to comprehend. As a result, they thought they lived in a world populated by demons and mysterious forces.

The recent era of global finance ... differed from the financial surge of a century ago. Its cultural manifestations also appeared to be novel. It was playful, allusive, and edgy - in short, post-modern. ...

An alliance was formed between financial experts who thought they were selling truly innovative ideas, a political elite that endorsed the philosophy of "regulation lite," and a cultural climate that pushed experimentation and the rejection of traditional values. The result was that every sort of value - including financial values - came to be seen as arbitrary and fundamentally absurd.

When incomprehension no longer produces new heights of prosperity, but rather economic collapse and failure, it is not surprising that it turns to anger. Finding out who is to blame becomes more and more like the late medieval and early modern search for witches: a way of making sense of a disorderly and hostile universe.

I don't really buy the explanation that an erosion of culture played a big role in the crisis, and even if it is to blame the post-modernism explanation seems suspect to me (e.g. believing that scientists, engineers, and so on understand things even if you don't is different than believing things are driven by mysterious forces that nobody understands even if, in the end, the faith in the scientists and engineers was misplaced). What do you think?

But one thing would probably have been the same: There would have been a huge housing bubble and a financial crisis when the bubble burst. And if Democrats had been in power when the bad news arrived, they would have taken the blame, even though things would surely have been as bad or worse under Republican rule.

You now understand the essentials of the current political situation in Britain ..., the Bush bust in America is the Brown bust here.

Do Mr. Brown and his party really deserve blame for the crisis here? Yes and no.

Mr. Brown bought fully into the dogma that the market knows best... In 2005 he called for "trust in the responsible company, the engaged employee and the educated consumer" and insisted that regulation should have "not just a light touch but a limited touch." It might as well have been Alan Greenspan speaking.

There's no question that this zeal for deregulation set Britain up for a fall. Consider the counterexample of Canada... where Reagan/Thatcher-type financial deregulation never took hold. Sure enough, Canadian banks have been a pillar of stability in the crisis.

But here's the thing. While Mr. Brown and his party may deserve to be punished, their political opponents don't deserve to be rewarded.

After all, would a Conservative government have been any less in the thrall of free-market fundamentalism, any more willing to rein in runaway finance, over the past decade? Of course not.

And Mr. Brown's response to the crisis — a burst of activism to make up for his past passivity — makes sense, whereas that of his opponents does not.

The Brown government has moved aggressively to shore up troubled banks. This has potentially put taxpayers on the hook for large future bills, but the financial situation has stabilized. Mr. Brown has backed the Bank of England, which, like the Federal Reserve, has engaged in unconventional moves to free up credit. And he has shown himself willing to run large budget deficits now, even while scheduling substantial tax increases for the future.

All of this seems to be working. Leading indicators have turned (slightly) positive, suggesting that Britain, whose competitiveness has benefited from the devaluation of the pound, will begin an economic recovery well before the rest of Europe.

Meanwhile, David Cameron, the Conservative leader, has had little to offer other than to raise the red flag of fiscal panic and demand that the British government tighten its belt immediately.

Now, many commentators have raised the alarm about Britain's fiscal outlook, and one rating agency has warned that the country may lose its AAA status (although the others disagree). But markets don't seem unduly worried: the interest rate on long-term British debt is only slightly higher than that on German debt, not what you'd expect from a country doomed to bankruptcy.

Still, if an election were held today, Mr. Brown and his party would lose badly. They were in power when the bad stuff happened, and the buck — or in this case, I guess, the quid — stops at No. 10 Downing Street.

It's a sobering prospect. If I were a member of the Obama administration's economic team — a team whose top members were as enthusiastic about the wonders of modern finance as their British counterparts — I'd be looking across the Atlantic and muttering, "There but for the disgrace of Bush v. Gore go I."